How Foremarket turns trades into probabilities, and probabilities into signal.
Foremarket prices outcomes using outcome shares whose value converges to settlement. Each outcome ( O_i ) is represented by a token that redeems to 1 if the outcome occurs and 0 otherwise. Prior to resolution, the market price of ( O_i ) is the implied probability of that outcome, conditioned on current information and incentives.
Rather than an order book, Foremarket uses an automated market maker (AMM) optimized for multi-outcome prediction markets. The AMM enforces a conservation rule across outcomes so that total probability remains bounded.
A simplified invariant (two-outcome case) can be expressed as:
Invariant:
f(q_yes, q_no) = k
Where:
q_yes, q_no are the AMM reserves of outcome shares
k is a constant
Prices are derived from marginal cost:
Price_yes = ∂Cost/∂q_yes
Price_no = ∂Cost/∂q_no
For multi-outcome markets, Foremarket generalizes this to an n-outcome cost function that ensures:
Σ Price_i ≈ 1
This guarantees probabilistic coherence. Buying one outcome necessarily moves prices on all others, encoding information efficiently.
Slippage, Depth, and Information Cost
Trades move prices according to trade size relative to liquidity. This is intentional. Large trades should move the market because they represent stronger conviction.
Slippage ≈ ΔPrice / ΔTradeSize
Higher liquidity reduces slippage, allowing prices to reflect information more smoothly. Liquidity providers are compensated via trading fees for supplying depth.
No “Correct” Price, Only a Current One
Foremarket does not attempt to determine truth. It exposes a mechanism where truth emerges from incentives. At any moment:
As new information arrives, traders arbitrage stale prices. The AMM encodes this process mechanically. The protocol does not interpret news, sentiment, or fundamentals. It prices belief under consequence.
Why This Works with Permissionless Creation
Because markets are permissionless, many markets will exist with thin liquidity. The AMM model ensures:
Prices exist immediately
Early trades are informative
Liquidity can grow organically
Creators are not required to seed deep liquidity. Markets bootstrap through usage.
This makes Foremarket a market factory: creation is cheap, pricing is automatic, and signal emerges wherever participants care enough to trade.